Table of Contents
- What Is a 529 Plan?
- Key Takeaways
- How 529 Plans Work
- Types of 529 Plans
- Fast Fact
- Tax Advantages of 529 Plans
- Benefits and Potential Drawbacks of 529 Plans
- 529 Plans vs. Brokerage Accounts
- 529 Plan Transferability Rules
- Additional Tips for 529 Plans
- How Much Does a 529 Plan Cost?
- Who Maintains Control Over a 529 Plan?
- What Are Qualified Expenses for a 529 Plan?
- The Bottom Line
What Is a 529 Plan?
As someone who's looked into saving for education, I can tell you that with college costs climbing and student debt piling up, many parents like you are using 529 savings plans to fund their kids' schooling. These plans, named after Section 529 of the Internal Revenue Code, started out for college expenses but have grown a lot recently.
Back in 2017 and 2019, laws expanded them to cover K-12 education and apprenticeships. Then the SECURE Act of 2019 and SECURE 2.0 Act of 2022 added student loan repayments and Roth IRA contributions. Come 2025, the One Big Beautiful Bill Act lets you use them for credentialing programs too.
Key Takeaways
You need to know that 529 plans are tax-advantaged for educational costs like K-12, apprenticeships, credentialing, and loan repayments. They come in two forms: savings plans and prepaid tuition plans, all run by states and D.C., with rules and fees varying by location.
How 529 Plans Work
Let me break it down for you: the two main types are college savings plans and prepaid tuition plans, both giving tax-deferred growth and tax-free withdrawals for qualified education costs. You, as the donor—often a parent—keep control of the account.
With prepaid plans, you lock in today's tuition rates for future use at specific schools, which can save money as costs rise. These plans are state-run, and anyone can open one, though parents or grandparents usually do it for a child beneficiary. In some states, your contributions get a tax deduction.
The funds grow tax-deferred, and if used right per IRS rules, withdrawals skip federal and state taxes. Check your state's plan details since tax perks differ—it's worth it to understand what you're entitled to.
Types of 529 Plans
College savings plans are the more common type, where you contribute money invested in options like mutual funds. You pick the investments, and their performance grows the account. Many include target-date funds that shift to safer assets as your kid nears college. Withdrawals cover college and K-12 costs, plus the SECURE Act added apprenticeships and up to $10,000 for student loans for beneficiaries and siblings.
The 2022 SECURE Act allows rolling over up to $35,000 unused funds to a Roth IRA if the account's 15 years old. And with the 2025 OBBBA, you can use funds for credentialing and more K-12 expenses, bumping the annual K-12 limit to $20,000 after 2025.
Prepaid tuition plans, offered by some states and schools, let you pay now at current rates for future tuition. They grow in value, and withdrawals for tuition are tax-free, but they don't cover room and board and are limited to certain colleges. Unlike savings plans, they're not for K-12, and there's no federal guarantee—check state protections before diving in.
Fast Fact
There's no yearly contribution limit to a 529, but states cap lifetime totals from $235,000 to $621,411.
Tax Advantages of 529 Plans
Withdrawals avoid federal and state income taxes if for qualified expenses; otherwise, you face taxes and a 10% penalty, except in cases like death or disability. Contributions aren't deductible federally, but about 40 states give deductions or credits.
To get that state tax break, invest in your home state's plan, though some let nonresidents in without it. On gift taxes, the 2025 exclusion is $19,000 per person, with lifetime exemptions at $13.99 million for singles and $27.98 million for couples.
For 529s, you can lump-sum five years' exclusions—like $95,000 in 2025—without hitting your lifetime limit, as long as no more gifts to that beneficiary for five years.
Benefits and Potential Drawbacks of 529 Plans
These plans have high contribution limits, flexibility in where you set them up, and they're easy to open with tax-deferred growth and tax-free withdrawals. Some states make contributions deductible too.
On the downside, investment options are limited, fees vary by state, you can't switch investments freely, and funds must go to qualified education expenses or face penalties.
529 Plans vs. Brokerage Accounts
If you're comparing, a 529 is education-focused with institutional sponsorship, limited investments, tax-deferred growth, and tax-free education withdrawals, but with lifetime caps. A brokerage account is general, self-managed with unlimited options, but taxes hit gains and dividends, and there's no education tax break or contribution limits.
529s often have age-based funds and state tax perks. If your kid skips college, transfer to family or use for loans/apprenticeships, but nonqualified pulls get taxed and penalized. Brokerage funds are free for any use.
529 Plan Transferability Rules
You can transfer to another 529 once a year, or more with beneficiary changes. Beneficiaries can switch to family like kids, siblings, parents, in-laws, or first cousins without needing a plan change.
Additional Tips for 529 Plans
Start early to let your money compound. Prepaid plans lock in rates against hikes. If funds are left over, switch beneficiaries, save for grad school, repay up to $10,000 in loans, or roll $35,000 to a Roth IRA if eligible. Or withdraw, but pay taxes and penalty on earnings.
You're not stuck with your state's plan, but it might give tax breaks—check that first.
How Much Does a 529 Plan Cost?
States charge $0 to $25 annually for maintenance. Brokers or advisors add fees on assets. Investments inside have their own fees—go for low-cost funds and ETFs to minimize them.
Who Maintains Control Over a 529 Plan?
It's a custodial account where an adult controls it for a minor. The beneficiary takes over at 18, but funds must still be for qualified education.
What Are Qualified Expenses for a 529 Plan?
These include tuition, fees, books, supplies, room and board, computers and software for school, special needs equipment, and student loan payments. Some costs don't qualify depending on education level.
The Bottom Line
A 529 plan is your tax-advantaged way to save for education from K-12 to grad school, plus apprenticeships and credentials. With various options, they offer flexibility and growth potential—pick one that fits your needs.
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